Government Strengthens Localization Requirements: Changes for Applicants and Authorities

The government finally admitted that localization was not functioning as intended. Due to the lack of control, manufacturers could compete unfairly and list products that did not actually have a sufficient percentage of localization. To solve this problem, the Cabinet of Ministers changed the Procedure for confirming the degree of localization, in particular:

expanded the list of documents required to localize goods;

–       empowered the Prozorro system commission to consider complaints regarding the compliance with localization requirements, and the Ministry of Economy to make a decision to exclude goods from the list of localized products, in particular, based on the commission’s decision;

–       provided for the possibility of blocking the manufacturer’s ability to localize the product for 1 year if it was repeatedly excluded from the list during the year.

So far, it is difficult to predict how these changes will work in practice. Of greatest concern are the new powers of the Prozorro commission.

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On May 24, by Resolution No. 597, the Cabinet of Ministers changed the Procedure for Confirming the Degree of Localization of Production of Goods, approved by Resolution No. 861 (hereinafter, Procedure No. 861). It also updated the powers of SE Prozorro and the commission to consider issues of the Prozorro system. This time, the changes affected the batch of documents that the manufacturer must submit to localize the product, the responsibility of the applicant, the grounds for excluding the product from the list of localized goods, as well as the powers of key bodies in this area.

Announcing the changes, the government explained them as the protection of Ukrainian manufacturers from unfair competition in public procurement. After all, localization requirements are now part of the Made in Ukraine local business support program, which it is implementing this year.

Briefly about localization

Localization requirements are a mandatory condition for a minimum percentage of the local component in the cost price of the goods that are the procurement item. On July 14, 2022, Law No. 1977-IX entered into force, which introduced localization requirements in the field of public procurement. Procuring entities have the right to buy some goods with a value starting from UAH 200,000 or more only if their degree of localization complies with the law. These are mainly goods in the field of mechanical engineering.

Since 2022, an increasingly higher minimum degree of localization has been in effect every year. In 2024, it will be 20%. This level will continue to increase each year until it reaches 40%. The exception is procurement that is subject to international agreements of Ukraine and its value thresholds.

According to Procedure No. 861, in order to include a product in the list of localized products, the manufacturer must submit a corresponding application, a cost-price calculation on the electronic platform, and also confirm that at least one of the product’s elements is produced in Ukraine and/or domestic elements are used. This application was relatively formal: product manufacturers filled out an electronic form with localization calculations, and the administrator checked the mathematical correctness of these calculations. All products that met the formula were included in a special list. The automatic check of the correctness of calculations according to the formula has remained, but new documents have been introduced.

One of the main ideologists of localization, Dmytro Kysylevskyi, Deputy Chair of the Verkhovna Rada Committee on Economic Development, admitted in his blog that the previous rules had functioned ineffectively. According to him, manufacturers often “cheated” and listed goods that did not actually have the required share of localization. Transparency International Ukraine warned about this, even when localization was only planned to be implemented. So, the innovations should help clean up the list and strengthen localization control.

New documents to be submitted by the manufacturer

Now, the list of documents to be submitted by the manufacturer along with the application has been structured and supplemented. In addition to calculating the cost price of the product and confirming that at least one of the product elements is produced on the territory of Ukraine and/or domestic components, aggregates, parts, and component items are used, starting May 28, the manufacturer must submit copies of the following documents with the application:

• certificate of compliance of the quality management system in production with the requirements of the state standardISO 9001:2015 or the state standard EN ISO 9001:2018, or national standards that will replace them, issued by an accredited compliance assessment body;
• for manufacturers of wheeled vehicles—several options for certificates were provided: a certificate of type of equipment or vehicle, or a certificate of compliance of vehicle or equipment, or a certificate of compliance regarding individual approval (in it, the location of the manufacturer must be specified in Ukraine), or a certificate of assigning the World Manufacturer Identifier Code (WMI);
• filled-out form of state statistical observation No. 1P-NPP (annual) “Report on the production and sale of industrial products,” determined by the State Statistics Service, with information for the previous reporting year.

It was also clarified that the cost-price calculation refers to the data of the current year. The submission format has remained unchanged: the manufacturer submits an application with documents online free of charge, fills out electronic forms, and uses the qualified electronic signature.

New powers and a new appeal process

The exclusion of goods from the list of localized products was added to administrator rights (SE Prozorro). Now, the administrator will do it not based on a letter from the Ministry of Economy, but its order, approved and submitted based on the results of processing not only the decisions of the authorized bodies and the court, but also the commission regarding the consideration of issues of the Prozorro system or an appeal of the person who submitted the application or the manufacturer of the product.

Accordingly, the powers of the Prozorro System Review Commission (hereinafter referred to as the commission) have also been expanded. The main tasks of the commission include decision-making regarding the non-compliance of the manufacturer of the goods included in the list with the requirements specified in the procedure, or the inclusion of goods not of the manufacturer’s production in the list. At the same time, the decisions of the commission are advisory in nature.

In addition, there will be a new appeal process—now in the field of localization. So far, the process has not been regulated, and the procedure for considering such appeals will be determined by the Ministry of Economy. However, the consideration of complaints about non-compliance of the manufacturer of the goods included in the list with the requirements specified in the procedure. Such non-compliance may be because the manufacturer did not submit the necessary documents together with the application, does not meet the requirements of the procedure, or entered goods not of its production into the list.

The commission was also given the right to receive documents and information from central and local bodies of executive power, business entities, necessary for the performance of the tasks assigned to it. The business entity submits documents and information at the request of the commission within 10 working days from the date of receipt of the request.

Now it is difficult to say who will be able to use this right of appeal, probably the business that will participate in the procurement. However, we should wait for the procedure for reviewing appeals from the Ministry of Economy.

Rejecting an application and excluding a product from the list of localized goods

The rules on the results of submitting an application have undergone changes. Now the application will be rejected automatically: “in case of errors in the application submitted by the manufacturer of the product or in case of the non-compliance of the product with the degree of localization of the current year, defined in section X, clause 6-1, subclause 1 of the Final and Transitional Provisions of the Law, or provided for by the additional list of goods approved by the Cabinet of Ministers of Ukraine in accordance with section X, clause 6-1, subclause 3 of the Final and Transitional Provisions of the Law.

The rejection of the application at an early stage on the listed grounds is logical, since the system will be able to immediately assess the compliance of the product with the degree of localization based on the information specified by the applicant. But the wording of the grounds raises questions. First of all, detecting which errors in the submitted application will lead to its automatic rejection? What if it will be formal, in particular grammatical errors? The resolution does not specify which errors are meant, but probably those that are available for automatic processing by the system. There are also errors in the wording of the provision itself, it needs editorial revision.

Resolution No. 597 clearly defines that the product will be excluded from the list of localized goods based on the decision of the Ministry of Economy. The Ministry of Economy can make such a decision both on the old grounds (decisions of the court, authorized bodies for supervision and control), and on new grounds:

1)    The decision of the commission according to the results of the review of the complaint. It can be a complaint:

–       Regarding the non-compliance of the manufacturer of the goods included in the list with the requirements specified in the procedure, in connection with the non-submission of the documents that should have been submitted together with the application.

–       Regarding the non-compliance of the manufacturer with the requirements of the procedure. These are requirements for design and technological documentation, registration of intellectual property rights, production of at least one of the elements in Ukraine or use of such an element, warranty and post-warranty service, ISO certificates, and special certificates for vehicle manufacturers. The commission may make a decision on such a non-compliance after reviewing the documents submitted at its request, or it may make a decision in the event of their non-submission.

–       Regarding the inclusion in the list of products of other manufacturer’s production.

2)    At the request of the person who submitted the application or the manufacturer of the product.

Summing up, we see that the commission will be entrusted with an additional workload. It is difficult to imagine how, in practice, based on the available documents, it will consider some complaints and, in particular, determine whether someone is registering a product of their own production or not.

In addition, a month later—after June 28—the product will be excluded from the list if there are no documents required for inclusion in it, especially the new documents that have been requested since May 28. This provision, however, does not specify who exactly will exclude the goods under it and who will check this.

There is also the question of whether this provision applies to all products that will be included in the list of localized goods after June 28—as of today, there are more than 2,800 of them—or only to those for which manufacturers will apply after May 28. If so, within a month, manufacturers must urgently add ISO certificates and form No. 1P-NPP to their applications so that all documents according to clause 4 of the procedure are available, although Resolution No. 597 does not specify where exactly the documents might be missing so that the goods get excluded from the list.

However, if this provision is interpreted as such that can be applied only to legal relations that arose after its entry into force, then exclusion from the list will not affect all goods.

Resolution No. 597 provided for another case when the manufacturer will not be able to localize the product if its product is repeatedly excluded during the year due to the decision of the authorized bodies, the court, or the commission based on the results of reviewing the complaint. In this case, SE PROZORRO will block the possibility of this manufacturer submitting applications. In fact, this is an increase in the manufacturer’s responsibility for the authenticity and completeness of the documents it provides.

Conclusions

The government admitted that localization had not worked as intended. Due to the lack of control, products that did not meet the localization requirements were included in the list. The government seeks to remedy this through changes:

–       expanding the list of documents to localize the product;

–       giving the commission on the issues of the Prozorro system the authority to consider complaints regarding the compliance with localization requirements, and giving the Ministry of Economy the powers to make a decision on the exclusion of a product from the list of localized goods, in particular based on the commission’s decision;

–       blocking the ability of the manufacturer to localize the product for 1 year if the product of this manufacturer was repeatedly excluded during the year due to the decision of the authorized bodies, the court, or the commission based on the complaint.

The approach under which only the manufacturer can include a product in the list of localized goods is being increasingly used because cases of localization of goods produced by other manufacturers can be appealed.

There is also a question about the possibility of localizing the goods for non-residents or their separate units if the requirement regarding the percentage of the Ukrainian component is met. For example, the manufacturer’s location in Ukraine must be specified in the certificate of compliance regarding the individual approval of a wheeled vehicle, which will be submitted with the application.

The outlined innovations are only part of the changes that await the field in the future: at very least, the Ministry of Economy will determine the procedure for appeals in localization issues. Currently, we believe that a large volume of work on the consideration of complaints will be assigned to the commission for consideration of issues of the Prozorro system. So far, it is difficult to imagine how it will consider some issues in practice, for example, whether the manufacturer indeed included a product of its own production in the list. The main challenge is checking the reliability of the manufacturer’s calculations. Now it calculates localization independently by the share of the cost of Ukrainian components in the cost price of the product. Several certificates, which will now be required additionally, will not help to check whether the calculations made are correct. However, the commission will make a decision based exclusively on the documents provided.

This publication was prepared with the financial support of the European Union. Its content is the sole responsibility of Transparency International Ukraine and does not necessarily reflect the views of the European Union.